Can the U.S.’s credit rating be downgraded?

It took the current administration less than a year to provoke a rating agency to warn that unless our government mends its profligate ways, it will lose the triple-A credit rating it has had since U.S. government debt was first assessed in 1917.

Moody’s had a busy week. Greece was downrated, and Spain and Ireland put on negative credit watch. All are running deficits equal to 12 percent of their GDPs.

So are we. But being America, with a reserve currency that central banks and others still hold and want to hold in huge amounts, we were granted a reprieve.

Although our “public finances are deteriorating considerably … [and] the question of a potential downgrade of the U.S. is not inconceivable,” such a move is not imminent, says Pierre Cailleteau, chief international economist at Moody’s. Moody’s U.S. analyst, Steven Hess, says, “If no policy changes are made [in social security and medical programs], in 10 years from now we would have to look very seriously at whether the U.S. is still a triple-A credit.”

Desmond Lachman, resident fellow at the American Enterprise Institute, thinks the grace period granted by the market might be as short as three to four years, and says a downgrade would send “a really bad signal” to overseas investors who are funding about half of our massive deficits.

We would have to increase the interest rates we offer them to get them to part with their money. That means higher mortgage rates — not exactly what the doctor ordered for the troubled housing sector — and higher charges to entrepreneurs hoping to obtain credit and expand, creating jobs.

A downgrade of the U.S. government’s credit would also make it difficult or impossible for pension funds, insurance companies and other institutions to buy U.S. bonds, driving interest rates still higher, and halting what anyhow promises to be a slow, drawn-out recovery in its tracks.

If the government engineers what Moody’s calls “a credible fiscal consolidation” — a cut in the flow of red ink, in ordinary language — America’s triple-A rating is secure. It comes down to whether you believe that this and subsequent administrations are likely to ditch profligacy for prudence.

On current evidence, that does not seem likely. Rather than pay down the deficit, the president proposes to use most of the $200 billion of unspent TARP money (the bank bailout Troubled Asset Relief Program) on still another stimulus program, even though the bulk of the $787 billion original stimulus package has yet to be spent.

He is rather like a man who decides that he is too deeply in debt to afford a new car, and then uses the “saving” from sticking with his existing vehicle — money he never had — to finance a round-the-world cruise.

Even more important is what the rating agencies are about to witness. The Democrats’ health care plan — which costs over $1 trillion — is about to become law. Legislation wending its way through Congress will reduce the independence of the Federal Reserve Board, increasing congressional oversight.

That means politicians who fear that the jobs market is not improving rapidly enough will pressure the Fed to keep interest rates low, and continue to buy up the profusion of IOUs emitting from the Treasury to cover the deficits. A costly energy bill is next in line.

Meanwhile, the off-balance sheet liabilities of the federal government are rising — the debts of states like California and the president’s home state of Illinois, the underfunded pension plans, the unbooked obligations to an aging population. These “skeletons”, as they are known, are always uncovered when a nation’s financial condition comes under close scrutiny.

In short, the outlook is not brilliant. The policy changes the rating agencies are looking for are nowhere in sight.

But Moody’s might be looking for relief in all the wrong places — the Oval Office, the halls of Congress, the offices of government bureaucrats. Policy might remain unchanged, but the great, energetic, entrepreneurial American private sector just might prove capable of coping with the burdens being placed upon it by the nation’s political class, and launch a new decade of rapid growth.

It always has in the past. Unfortunately, the past is not always prologue.